Q3 2020 Gran Tierra Energy Inc Earnings Call
To the Gran Tierra Energy's results conference call for the third quarter 2020, My name is Victor and I'll be your coordinator for today.
At this time all participants are in a listen only mode. Following the initial remarks, we will conduct a question and answer session for securities analysts and institutions instructions will be provided at that time for you to queue up for questions.
If at any time during the call you require audio assistance. Please press star zero and a coordinator will be happy to assist you.
I would like to remind everyone that this conference call is being is being webcast and recorded today Tuesday November Thirtyth 2020 at 11 am Eastern time.
Today's discussion may include certain forward looking information as well as certain non-GAAP financial measures.
Refer to the earnings and operational update press release, we issued yesterday.
Good morning, disclaimer with regards to the information and reconciliation of any non-GAAP measures discussed in today's call.
Per barrel of oil equivalent or B O E amounts are based on working interest sales before royalties. Finally this earnings call is the property of Gran Tierra energy Inc. any copying or Rebroadcasting of this call is expressly forbidden without the written consent of Gran Tierra energy.
Oh, and I will now turn the conference call over to Gary can get dream.
President and Chief Executive Officer of Gran Tierra Mr. Guidry. Please go ahead.
Thank you operator, and good morning to everyone, you'll you'll find our quarterly results on our website at Gran Tierra Dot com.
With me today are Ryan Ellson, our executive Vice President and Chief Financial Officer.
And we'll be giving an overview of the quarter and the path that we're on Tony.
Tony Brooklyn, our Chief operating Officer will give a summary of the operating activities and then we'll open the line to questions over to you right.
Good morning, everyone order.
Order last call, we outlined aggressive actions, we undertook to protect our balance sheet and cash flows given the recent volatility fees by the oil and gas industry. We have achieved significant reductions in operating and unit cost and we're well positioned for 2021 and beyond.
We also discussed how we have initiated the required activities to safe, we resume several operations rotor Columbian portfolio and strict accordance with our COVID-19 protocols production is now beginning to ramp up and developments in workover activities are underway.
We're pleased with the progress at Gran Tierra has achieved with the safe reserve operations. The safety of our style contractors in local communities, where we operate is paramount.
We commend the teams for their excellent work during the many challenges of 2020 and their diligent management of COVID-19 safety protocols, which has allowed an earlier restarted development activities than we originally forecast.
One of our key objectives is finished 2020 strong order set up for a four construct important 21.
We believe we are well positioned to withstand the current volatile environment and <unk> with our low base decline conventional oil asset base and the operational control from a capital allocation target well, maintaining a low cost structure, ensuring the safety of our people no I'll discuss some of the production and financial highlights our oil production in the third.
Quarter was 18944 barrels per day down 6% from Q2 current production is approximately 22000 barrels per day through.
Through both direct refunds from the Colombian government and view to you on our oil sales Gran Tierras quarter total beauty in income tax receivable of approximately 97 million during 2020.
By the end of the third quarter Gran Tierra had also pay downs growth. So the balance of 200 million compared to 200 million at the end of Q2 and had 21 million of cash and cash equivalents.
During Q3 G.'s combined operated work over in transportation expenses of 12 doors and 63 cents per barrel were down 31% relative to the first quarter of 2020.
<unk> cost were down 8% on a per barrel basis over the same timeframe.
On a regular basis. These expenses decreased 56 million in Q1 of this year to 27 million in Q3, a 53% reduction.
The majority of these cost reductions represent structural improvements in operations, which are expected to be maintained in a rising oil price environment.
As a result of ongoing cost saving initiatives, we also expect future per well drilling and completion costs to be reduced by approximately 30% in accordance arrow and 20% cost jaco compared to 29 team.
With the significant oil price world fielding logistical challenges due to coordinate gene grudge your electric usury capital expenditures at a relatively low $7 million. Our Q3 net loss was 108 million included a non cash ceiling test impairment of 105 million.
These results are improving growth Q twos that loss of 371 million, which included non cash ceiling test impairment of 398 million.
Non cash impairments result from Citi significantly lower oil prices that occurred in the respective rolling trailing 12 month period.
Q3, adjusted EBITDA was 22 million up from Q twos 18 million cubic feet Q3's funds flow from operations 8 million up from Q2 6 million were in excess of Q3's capital expenditures during the quarter, we entered into additional oil price hedges to further down downside protection against near term low price.
Sunburn by securing three way Brent coerced a total of 11000 barrels per day is hedged for the fourth quarter of 2000 29000 barrels per day for the first half of 2021 in summary, we have taken aggressive actions productive balance sheet and cash flows given the recent volatility fees and industry, we've achieved significant reductions and offer in June a cost.
And we are well positioned for 2021, I'll now turn the call over to Tony Schuh, <unk>, Chief operating officer to discuss our operational highlights.
Thanks, Ryan and good morning, everyone.
At Acordionero, the first Workover rig restarted operations on September 1st and is currently on its fourth Workover.
Just first Workover rig is forecast to continue operations in the field through the end of 2020 and into the first quarter of 2021.
A second Workover rig is now started up at Acordionero to accelerate workover activity.
He's workover rigs are expected to return production by 2020 year end on a total of eight to 10 wells, which went offline during the first half of 2020. The total combined productive capacity of the 10 highest priority wells for Workover is estimated to be approximately 3500 barrels of oil per day.
We also expect to restart development drilling at Acordionero during the fourth quarter, we plan to drill one to two wells new.
New oil wells by 2020 year end.
These new wells are expected to begin production during the first quarter of 2021 did.
The drilling rig is then forecast to continue drilling new development oil wells at Acordionero throughout 2021.
The next 10 planned wells eight oil producers and to water injectors are scheduled to be drilled from the newly constructed south west pad.
Each of these new wells is expected to have an initial oil production rate of approximately 550 barrels of oil per day.
Moving to the per ton mile. We're pleased that the gland be field commenced production on August 28, after a previous shut in due to local farmer blocking.
Prior to the blockades in late February 2020 activities are underway to expand nickel hanby water treatment injection and processing facilities under a two phased expansion program.
The combined phased expansion would be expected to significantly boost gross water injection capacity to potentially increase ultimate oil recovery.
Lastly, I'd look at it gradually continue to optimize the waterflood during the quarter and oil production and water injection were inline with expectations.
In summary, we are pleased that we have been able to safely resume operations in strict accordance with COVID-19 safety protocols that we have put in place.
I'll now turn the call back to the operator, and we'll be happy to answer any questions. Operator. Please go ahead.
Thank you as a reminder, ladies and gentlemen asked the question you need to press Star one on your telephone to withdraw your question just press the pound key.
Please stand by when we compare the Q and a roster.
And our first question will come from the line of Warner writing from Peel Hunt you may begin.
Good morning, guys.
So in spite of production having restarted.
Restarted in front back at 40, Youve equities, obviously remaining stubbornly low because of concerns around get that position. So.
I don't have a specific question per se, but I'd be more interested to hear your plans on how you come to meaningfully reduce your debt. So that equity holders can can see some transfer of value to that part of the capital structure.
Yes, all take us out of the I think when you look out to you know we will start with Q4 here you know obviously the objective as Tony mentioned is too can do work over program in accordance arrow.
As well as costs Jaco and development drilling in accordance Arrow and so you know the company looks a lot different at 20 to 30000 barrels a day that does a 22000 barrels a day from a free cash flow perspective. So ultimately you know there's been nothing changed at the asset base as far as original oil in place et cetera.
This is really just a timing issue June due to your very challenging 2020, 2020 with a you know a pandemic and a price war. So the underlying asset quality is there and in a rising oil price environment would you expect to generate more free cash flow, which ultimately we use to reduce our debt.
Uh-huh.
Okay all right. Thank you.
Thank you. Our next question will come from the line of Leo Hahn from eight capital you may begin.
And my guys. Thanks for taking my question, it's not really related to the quarter. Just wondering were seeing a lot of industry consolidation here in North America, whether its inquiry reallocate encana listen outlets Husky, just wondering if you could sort of comment on the outlook on the consolidation trend in Latin America, and how do you see Gran Tierra player.
Yes. Thanks.
Sure.
I think.
It across the industry.
You are starting to see consolidation, it's not just the Permian, it's not just western Canada.
You've seen Occidental petroleum, so over $700 million worth of assets to.
To a private equity firm back from and Colombia.
And we fully fully expect the consolidation in the industry to continue its been a tough year for the entire industry, but it don't let that mask the overarching the overarching climate change the transition.
Transition of energies.
And to do that I think the industry are facing unprecedented.
[noise] obstacles I guess obstacles as the best word or headwinds.
For capital in the market and so.
The consolidation in the Permian is certainly welcome by the industry. It's a it's hopefully going to end up in a in a better managed portfolio.
And different reasons for different consolidations.
Globally, and we don't expect we don't expect Latin America in general to be any different it's a matter of sustainability long.
Yeah, Thats excellent color I, just a just a quick follow up I think last time on top of this the bid ask spreads in the market. Some buyers sellers are pretty high do you still see that as the case today or do you see that kind of start generic down now.
I think the bid ask spread is always you know, it's tough to pin that down, especially when rates have been so volatile, but I think what you've seen is you know to have to get around that challenge is companies essentially merging with zero premiums and I think that's I think we'd.
To see little to no premiums going forward.
Thanks, I appreciate the color Thats it for me.
Thank you. Our next question comes line of David Brown from BMO capital markets you may begin.
Hi, guys.
Just one on the debt I think you've got the next Redetermination. This month. So I was wondering if you can say anything about expectations, there and whether because you are quite late and agree in the last redetermination, whether you've already stuff, but the borrowing base reduction given that the crisis. We've we've seen this year.
Yeah.
And then there was also talk and the last set of results of possibly.
Possibly prepayment facilities is there any updates around around those please.
Yeah, Thanks, EBITDA on the growing base.
You know part of.
The objective is to have the Boeing based on by the end of November.
So we've just started that process.
Yeah. It's a good reminder, all everything is relative if you look at last item started read the reserve Redetermination process, you'll Brent was $18 in April so prices are more constructive, but it's a challenging time for not just the sector, but for the banks as well with their exposure to energy so.
You know as we have more information on that we'll certainly were Lisa.
We're always open to other source of liquidity you mentioned Prepays, that's one source.
There is also potential of you know far modes asset sales et cetera, right now we're looking at all sources of liquidity to strengthen the balance sheet for the benefit of all stakeholders.
Okay, that's great and cannot just maybe just last one on the Acordionero and apologies if I missed it but are you able to just say how you expect to see production ramp up that were over there or at least the next couple of months.
Yeah, you bet, it's Tony here so.
So as as we mentioned in our press release, we're targeting eight to 10 hyped up productivity wells that basically during this first and second quarter late first quarter and through the second quarter as as wells went down we chose not to repair those so really it's about continuing base waterflood optimization and then layering in.
That shut in production.
As I mentioned were in our fourth Workover and we'll look to continue that activity through the remainder of the quarter to build that production gap.
Okay. Okay, great. Thank you.
Thank you. Our next question will come from line of Al Stanton from RBC you may begin.
Yes, good evening guys. So I just wanted to go back to some of the guidance you gave earlier in the year for second half spending it was things like Capex of 25 to 35 million I suppose based on what we spent in Q3. Those numbers are now sort of 18 to 28 I was wondering if that is still reasonable guidance and then also.
With respect to money coming in there was commentary about tax rebates I was wondering if they were flying in Q4 as you previously anticipated.
And then tying that all together I appreciate you've had your covenants relax, but there is still the one outstanding one which I think is that EBITDA.
EBITDA to interest which has to be at two times I was wondering if if that has any consent fees in the fourth quarter.
Yes, I'll touch on that with respect to the guidance, there's no changes to our previous issued guidance.
With respect to the.
Hey, those vector capital with respect to.
On the EBITDA.
If you look at our classroom for upstream as they were fairly robust disclosure in there based on our current forecast we expect to be in compliance, but you are as you know with you know the the challenges in the market right now things are volatile. So I would encourage you to take a look at it.
Our financial statements and the disclosure in there.
And then.
The last question sort of last question I'll tax that's how okay with that.
Yes.
Not too bad.
Thankfully has been come in as we anticipated.
And do you know.
Right now most of the lumpy amount to have come in during this quarter and going forward on all of our sales. We do a view you charge or sales. So that really is when we got that much monthly from our customers.
And if I may can I just ask one last question I've seen the cost coming down on transportation.
That's not reflected in a in a lower realizations I was wondering how the dynamics of the local loyal market or whether you're happy with but.
Well head prices that space effectively.
We are we actually improved our netback.
Both a coordinated roll and in Sorrento during the quarter in accordance arrow it.
Started in July and inserted into certain in September. So we're quite happy with their current arrangements that we have and also have been very pleased with the current differentials. Both you know as you know with the shortage of heavies worldwide differentials have continued to tighten they were fairly tight in the quarter and weve even tighter.
More in the last week or so.
Thanks, guys.
Thanks.
Thank you. Our next question will come from the line of Josef Schachter from Schachter Energy you may begin.
Good morning, and thanks for taking my call.
Two questions right now what is the situation with Colgate in Colombia and are they facing the same kind of issues, but we're getting like in Europe, where there's more caseload when they're going into quarantine again, and if such a thing was what's happening what would that do to impact your your your activity plans.
In Q4 and going forward. If there was an acceleration of the caseload and more of a court date situation.
Okay. Thanks, Thanks Joseph.
No Colombia is not seeing a significant spike that is occurring and Europe.
I think the the country has done a good job of the way they manage a managed code in the country we operated throughout.
Tony and the team have have made crew changes from the very beginning by putting protocols in place and so are our view is we are gradually bringing our staff and bogot tall.
Back into the office, but throughout the throughout all of the cobot outbreak. We continue to operate our fields that are economic and so we're very comfortable with our teams protocols that are that are in place to.
To move people and logistically around the country that to ship oil.
Throughout the country.
And.
We we monitor it closely but the answer to your first question is no not seeing the same thing is happening in Europe and the second is we don't anticipate any impact with what we have in place.
Okay Super next started moving onto the cover.
Is if we have if the questions were about the debt if we see Brent at 45 50, the extra capital would not go into more activity would go to pay down debt and then on the other side of the coin. If we saw Brent go to 35 or 30 because of all the issues of it but maybe more covert unless demand.
Would you re restrain your spending would you cut back and what price point would you should be watching for for the activity level to be pulled back.
Yes.
I think the answer to that.
Joseph is back in August September as as things started stabilizing we had hedges in place we put more hedges in place before we started reactivating fields and the anticipation was through the middle of next year.
We're comfortable that we have hedges in place to reactivate fields and start ramping production naturally we like the rest of the industry watchers are our pressure.
Pressure point is 25 to $30 a barrel.
Where we have to reverse that and we we watch that closely because it cost us money.
To shut in fields and.
The first part of your question as that that's at at what is our pressure point on the downside we're comfortable even.
Even with today's volatility that we have we have the financial instruments in place the second.
The first part of your question is at 45 to 50.
The beauty of our portfolio as we effectively operate everything and so we have the ability.
Turning to allocate capital.
And you're exactly right that at 45 to $50 a barrel, we will manage our development and our operation going forward into next year as well and that's that's really what Tony and the team watch.
Okay Super Thanks, very much that does it for me.
Thank you. Our next question will come from the line.
On the go a spinoff from Compass you may begin.
Yes, Hello, guys I.
I have three questions. The first one each and if you can give us some color on opex going forward you have been spending between $20 million to $25 million per quarter. So my question here is what is a more sustainable level going forward and.
The second question is if you'd have any exit production part of it with all the development plans that you have on the third question is if you can confirm that your expected capex for that fourth quarter will be between $25 million to $30 million. The correct. Thank you.
I'll take the tone here I'll take the Opex question start off with that so.
Yes, we as we come into the fourth quarter clearly, we're going to continue with some of the Meyer field Reactivations.
So looking at lifting cost forecast coming into the quarter I would expect us to be in that 20 million range to 22 somewhere in that.
Range.
On the Workover cost, obviously, we're going to continue to accelerate the workover activity on those suspended wells. So some of that cost will increase as we continue that workover, that's a split between capital and Opex for for that activity. So in the fourth quarter, Yes, we will see some incremental cost, but there will be barrels coming with that so on a per.
Really basis, we like to stay relatively flat.
So that's guidance on Opex and then in terms of they exit targets much will depend on how how things go with coated managing coded and continuing that activity.
But so you know.
On that we will provide more formal guidance.
Coming up but but yeah. We are at 22000 barrels now and we look to continue to add production, both through minor fields and and some of the workover activities.
And then on the as Tony mentioned, we do have a fairly significant amount of fixed cost will 70 or 70% of our costs are fixed so as we ramp up production, we would expect to get the benefit into into the end of this year and into next year and our in our capital guidance was 25 to 35.
5 million.
Thank you Mike.
Thank you.
Our next question comes line of Ivan Fernandes from pick that you may begin.
Hi, guys. Thanks for the call couple of questions on the T. refunds could you tell us exactly what was the total collected during all need at third quarter I guess the language isn't it a bit I guess you could have included though told were in early November in the in the language you put in the press release.
Yes, I do.
We only included in here just for the year to date and that year to date was as of September Thirtyth.
Okay.
All right. So what was the total for the third quarter.
That is a good question.
Just as it did in the language on the second quarter and it doesn't quite make it easy to calculate the total up to that point.
You want to come back to that one yeah alcohol I'll come back to that one sure. Okay. Sure. The second question is on the recalculation of the lending base for numbers over there sorry, I joined the call little late so I'm not sure I already commented on this but could you tell us how those conversations are going I think the next calculation is on Nov correct.
Yes, and we just we just kicked off the process. So as we have more news, who will walk data update the market.
So you can give us any any any ceiling to haul all good reaction has been so far.
He ever Sanchez and process literally the process has just started but I think you put in context of the last redetermination prices are up quite a bit higher our costs are down and we're we're comfortable with our reserve base.
As our December Okay [noise].
Right. So again I don't want to hold up the call space you guys like maybe to email me the answer for data reported third quarter that would be fine.
Yes, actually the amount collected just during the third quarter was $50 million and that's a combination of revenue as well as direct refunds.
Okay, and do you have any kind of expectations for the fourth quarter, we teach.
It was the B, yes for Q4 most of it I had mentioned earlier most of its coming through the revenue side of things and depending on pricing, we would expect between 10 and $15 million.
Okay. Thanks, a lot guys. Thank.
Thank you.
As a reminder, that star one for questions.
Our next question comes line of outboard cancer from Eaton Vance you may begin.
Hi, guys. Thanks for the time.
Just a few questions for me. The first one is I was just looking through the cash flow statement working capital, especially the accounts payable line item has been quite a large driver.
For the other day did a specific there's a line item on under cash flow from investing activities I think was 69 million.
For the year to date period.
Can you just can you explain what that is.
Yes that really is I think if you look at.
Q4 of last year.
You know there was a very heavy spend and in Q1 of this year was fairly heavy spend it relative to our funds flow.
We're expecting a more of a balanced quarter, but then prices fall out at the end of February.
So really thats just the unwinding of the payables. So now we've gotten all of our vendors current.
Do the payables related to Capex spend those done, yes, exactly capex and opex, but the majority would be capex.
Okay. So there's there's not there's not a concern you know if your suppliers wanting to collect foster because it's concerned on the company.
No no no. It was just asking all of those those payables current and you know there was a little more.
Industry, good our suppliers felt a lot of stress.
And you know the dark days of April May and June.
So I think there everyone is feeling some stress during that period no yard suppliers are in good shape and we have everyone caught up.
Okay.
The next question I'd Love you had mentioned earlier that you know you have certain levers for liquidity farm outs and asset sales being a couple of them I guess, you just mentioned them, but can you give maybe.
Maybe just some numbers around or just some details on what the options are.
How fast could you execute on those plans and on a farm my point I mean, obviously, you've got the capital plan quite a bit.
Does it make sense to maybe farm out just so that someone can and someone else can carry the capex and you're not maybe harming somebody assets by under investing in them.
Yes, two questions as far as timing I'm look said if the market is quite volatile, but we're continuing to look at those auctions and one of them it could be either a sale of some reserves or.
A.
Farm out or farm into some of our exploration loans.
I think we'd look at both of those auctions I think from from our core assets from a development standpoint, we're very comfortable that we're maintaining proper reservoir management on a coordinator will cause the arkoma, Kevin and sort out there so to the extent that we could accelerate some of the exploration with someone else's money, we're absolutely something that we would do.
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But what I mean, what would be the trigger for that decision I mean.
Things are pretty tough right now so why not do it now.
Yeah Yeah.
He said.
We are we are looking at the process.
And.
And as we have any updates on that we'll certainly let the market know.
Okay, and just a couple more questions is there a weekly to hedge the vasconia discounts that if that widens out and I know the selloff that getting kind of protect yourself.
Yes, one of the challenges you know, we do overhead hedges with our syndicate and right now our syndicate doesn't have the capacity to have US go here, but it is something that we'll continue to look up.
Okay and then the last question I I wasn't joined a few minutes yet I'm not sure. If you touched on this but you know pro forma for all these work over programs what is your production going to be.
Yes, Tony here, so we've talked about adding roughly 3500 barrels of production.
Some of which we've already added to get to that 20000 barrel production rate today. So.
So that's kind of the target that were looking at with the eight to 10 highest producer wells that are currently shut in.
And then again in any of the new drilling or anything that's.
That's correct.
So how do I, how do I reconcile that 22000 with a 30 plus that you were doing a year ago.
Well I think the big part is we stopped drilling we stopped our development drilling and accord narrow and some other things we're planning and so that's that's really just deferred production that will catch up once once.
We start drilling Tony and the team are working on that now.
And we expect to resume production before the end of the year.
And we do have other production behind pipe, we will work over in Q4 Q1 of next year.
As well as some other fuels will bring on in a more constructive environment.
Construction lemon being what.
Better price better pricing.
Okay alright, thank you.
Thank you.
And gentlemen, there are no further questions at this time please continue.
Okay. Thank thank you operator, and thanks, everyone for participating in today's conference call. It's been a very unusual year. We thank you for your patience and your support and we look forward to talking to you. After the next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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